Capital gains tax - turning the screw

THE current rates of Capital Gains Tax (CGT) are 10 per cent, to the extent that any income tax basic rate band is available, and 20 per cent thereafter. Higher rates of 18 per cent and 28 per cent apply for certain gains; mainly chargeable gains on residential properties with the exception of any element that qualifies for private residence relief. The CGT annual exemption is £11,700 for 2018/19 and will be increased to £12,000 for 2019/20.

There are two specific types of disposal which potentially qualify for a 10 per cent rate, both of which have a lifetime limit of £10 million for each individual:

* Entrepreneurs' Relief (ER). This is targeted at working directors and employees of companies who own at least five per cent of the ordinary share capital in the company and the owners of unincorporated businesses

* Investors' Relief. The main beneficiaries of this relief are external investors in unquoted trading companies who have newly-subscribed shares.

The Chancellor has stepped up efforts to tackle misuse. With immediate effect for disposals on or after 29 October 2018, two new tests are to be added to the definition of a 'personal company', requiring the claimant to have a five per cent interest in both the distributable profits and the net assets of the company in order to qualify for ER. The new tests must be met, in addition to the existing tests, throughout the specified period in order for relief to be due. The existing tests already require a five per cent interest in the ordinary share capital and five per cent of voting rights.

The government will legislate in Finance Bill 2018-19 to increase the minimum period throughout which certain conditions must be met to qualify for ER, from one year to two years. The measure will have effect for disposals on or after 6 April 2019 except where a business ceased before 29 October 2018. Where the claimant's business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group) before 29 October 2018, the existing one-year qualifying period will continue to apply.

Draft legislation has been issued to provide a potential entitlement to ER where an individual's holding in a company is reduced below the normal five per cent qualifying level (meaning five per cent of both ordinary share capital and voting power). The relief will only apply where the reduction below five per cent occurs as a result of the company raising funds for commercial purposes by means of an issue of new shares, wholly for cash consideration.

Where a disposal of the shareholding prior to the issue would have resulted in a gain which would have qualified for ER, shareholders will be able to make an election treating them as if they had disposed of their shares and immediately reacquired them at market value just before dilution. To avoid an immediate CGT bill on this deemed disposal, a further election can be made to defer the gain until the shares are sold. ER can then be claimed on the deferred gain in the year the shares are sold under the rules in force at that time.

The new rules will apply for share issues which occur on or after 6 April 2019.

CGT on the disposal of residential property by non-UK resident persons has been in place since 2015. Draft legislation has been issued to extend the charge to all non-UK resident persons, whether liable to CGT or corporation tax, on gains on disposals of interests in any type of UK land, whether residential or non-residential. Certain revisions are to be made following a further technical consultation when the full legislation is introduced but the key points are covered here.

All non-UK resident persons will also be taxable on indirect disposals of UK land. The indirect disposal rules will apply where a person makes a disposal of an entity that derives 75 per cent or more of its gross asset value from UK land. There will be an exemption for investors in such entities who hold a less than 25 per cent interest.

All non-UK resident companies will be charged to corporation tax rather than CGT on their gains.

There will be options to calculate the gain or loss on a disposal using the original acquisition cost of the asset or using the value of the asset at commencement of the rules in April 2019.

The CGT charge relating to the Annual Tax on Enveloped Dwellings will be abolished. The legislation will broadly have effect for disposals from 6 April 2019.

If you would like further information on these changes, contact David Cairns at Hawsons on 01604 645600 or by email davidcairns@hawsons.com